Will Coca-Cola Amatil Ltd shares run out of fizz?

Coca-Cola Amatil Ltd (ASX: CCL) is a 29%-owned subsidiary of Atlanta-based The Coca-Cola Company, having an exclusive licence to bottle and distribute Coca-Cola products, within the Asia-Pacific region. Coca-Cola Amatil currently operates in six countries and yesterday secured rights to distribute Monster Energy drinks in Australia according to reports in the Fairfax Press. The deal comes amidst slowing sales growth in its namesake brand, driven largely by key consumers being more health conscious.

Despite reporting a return to sales growth in its full year results, Coca-Cola Amatil’s share price has gone virtually sideways for the last six months, leaving one to…

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Coca-Cola Amatil Ltd (ASX: CCL) is a 29%-owned subsidiary of Atlanta-based The Coca-Cola Company, having an exclusive licence to bottle and distribute Coca-Cola products, within the Asia-Pacific region. Coca-Cola Amatil currently operates in six countries and yesterday secured rights to distribute Monster Energy drinks in Australia according to reports in the Fairfax Press. The deal comes amidst slowing sales growth in its namesake brand, driven largely by key consumers being more health conscious.

Despite reporting a return to sales growth in its full year results, Coca-Cola Amatil’s share price has gone virtually sideways for the last six months, leaving one to question whether it has lost its edge.

Here’s why I believe it has.

The Instagram generation

One of the problems faced by iconic Australian companies like Coca-Cola, Myer Holdings Ltd (ASX: MYR) and, to a lesser extent, Woolworths Limited (ASX: WOW), is the rise of a new generation of consumers, I like to colloquially term as “the Instagram generation”. These consumers — typically generation Y and below — have undergone dramatic changes in attitudes which most industry stalwarts like Coca-Cola fail to understand.

Unlike their predecessors in generation X and the baby boomers, the Instagram generation is young, hip, and above all, unpredictable. Their tastes vary from day to day, making life difficult for companies like Coca-Cola Amatil to find the right mix of marketing and sass to appeal to this generation. The result is a loss of brand interest by a substantial portion of the market.

This is one of the fundamental problems faced by Coca-Cola Amatil and is driven primarily by the Instagram generation’s desire to be young, fit and fabulous; it appears that the Coca-Cola brand just doesn’t fit that mould anymore (hence its slowing sales growth in key markets like Australia).

New market opportunities

Nevertheless, Coca-Cola remains determined to instil brand loyalty in the young, just like it did to many older generations over the last 100 years.

The recent announcement by the Fairfax Press positions Coca-Cola Amatil to take a solid foothold in the $1.2 billion energy market, which Coca-Cola Amatil presumably hopes will create a greater connection for the Instagram generation, leading to increased sales for the group.

Foolish takeaway

I believe the problem with Coca-Cola Amatil is that it no longer has a captive market. New healthy eating trends (aka #CleanEating) and changes in consumer tastes have meant people are turning away from soft drinks and choosing healthier beverage offerings instead. This has led to slower sales growth and an erosion of margins, providing no impetus for its share price to move higher.

Although the acquisition of distribution rights for Monster Energy drinks in Australia should allow it to tap into a $1.2 billion market, I don’t see it providing a miracle cure to changes in customer preferences, meaning the share price won’t magically recover its prior glory.

Therefore, despite the acquisition, I won’t be rushing out to buy more at current prices.

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Motley Fool contributor Rachit Dudhwala owns shares of Coca-Cola Amatil Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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